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Wednesday, June 17, 2009

Proposed JPY bond issuance of US$500mn - The planned Samurai bond issuance of US$500mn with JBIC guarantee could ease pressure on a local bond market that remains wary of higher debt supply risk following the government's recent revision of its FY09 fiscal deficit target to 3.2% of GDP (from the previous 2.5%), and the likelihood of ratings action by long-term credit rating agencies in view of a swelling fiscal deficit. We anticipate less selling pressure on the intermediate- to long-end in the near-term on the news. Neutral to ROP and CDS spreads - We view that ROP spreads and CDS spreads should not react negatively to the planned Samurai bond issuance since it does not expand ROP supply. With local banks having modest JPY deposits in their FCDU books, we may see modest onshore demand for the planned JPY bond issuance. Other key benefits/costs - The JBIC guarantee on the Samurai bond issuance lowers the interest cost than otherwise would have been obtained. It's not the maiden Philippine issue, although the last Samurai bond issuance was in 2000, when the government floated 55bn Yen (~US$325mn) of 5-year bonds with a coupon rate of 3.2%. Increased Yen exposure in a weak US$/Asia setting would be a disincentive from a liability management point of view, but not a major one. Government debt exposure to Yen-denominated foreign debt (arising from ODA borrowings [US$8.76bn] and bonds [US$508mn]) was roughly 24% of total government foreign loans as of Feb-2009. Aside from the relatively low interest cost with the guarantee, the Japanese government's program lacked 'pre-conditionalities', another interesting facet of the program, although we suspect that having the IMF's 'seal of good housekeeping' under the usual Fund's program policy monitoring would be still be needed. The government may want to test investor appetite in the Samurai bond market, while perhaps reserving a larger Samurai bond float with JBIC's guarantee to fund next year's budget program. Revise lower our fiscal deficit forecast to 4.5% of GDP from 2.5% previously - The combination of weak cyclical environment and a tax to GDP ratio likely stalled in the range of 12%-13%, could lead the fiscal deficit to balloon to Php350bn or roughly 4.5% of GDP. At 12%, the low end of the range, the fiscal gap could expand to more than Php400bn or 5.3% of GDP. We note the tax to GDP ratio trend (using Hodrick-Prescott filter) stabilized at close to 14%, but the first quarter actual estimate of the tax to GDP ratio (11.5%) fell way below this estimate. Raising this ratio to the range of 12%-13%, still below the tax ratio trend, and without benefit of new revenue measures, would still be deemed a sanguine fiscal scenario. To view this full article click on the link below: https://www.citigroupgeo.com/pdf/SAP28280.pdf